Models for Converging Economies

Andrew Harvey and Vasco Carvalho

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The aim of this article is the development of models for converging economies. After discussing models of balanced growth, univariate models of the gap between per capital income in two economies are examined. The preferred models combine unobserved components with an error correction mechanism and allow a decomposition into trend, cycle and convergence components. A new type of second-order error correction mechanism is shown to be particularly useful in this respect. The levels of per capita income in two economies may be modelled jointly by bivariate convergence models. These models generalise balanced growth models and can be based on autoregressive or unobserved components formulations. Both approaches provide coherent forecasts but the unobserved components models also yield a description of trends, cycles and convergence components. The methods are applied to data on the US and Japan. The generalisation to multivariate series is then set out.

Keywords: cycles; balanced growth; error correction mechanism; stochastic trend; unobserved components (search for similar items in EconPapers)
JEL-codes: C32 O40 (search for similar items in EconPapers)
Pages: 33
Date: 2002-05
New Economics Papers: this item is included in nep-dev
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0216

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